To The Moon

Summary

• Bitcoin and other cryptocurrencies have had a strong year so far, both in terms of absolute returns and positive net inflows.
• The VanEck Digital Transformation ETF (DAPP) has underperformed the Information Technology sector and S&P 500, though, as investors' attention seems focused on spot Bitcoin and Ether funds.
• DAPP's valuation has improved, but its top-heavy allocation is a risk as price consolidates.
• I highlight key price levels to monitor on the chart heading into two often-strong months for bitcoin, which could bode well for DAPP.

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It has been another banner year for Bitcoin and other cryptocurrencies. With the SEC’s approval of 11 spot Bitcoin ETFs back in January and the subsequent sign-off on Ether funds recently, flows into coins and tokens remain robust. Still, after a rapid run-up, Bitcoin’s rally has paused close to where it topped out at in late 2021. Some of the shine has also been taken off of crypto-related stocks as AI stays in the spotlight.

I reiterate a hold rating on the VanEck Digital Transformation ETF (NASDAQ:DAPP). The valuation remains a risk in my view while the fund, close to the unchanged mark so far in 2024, has underperformed the Information Technology sector (XLK) and S&P 500 in recent months.

Bitcoin +53% In 2024

Seeking Alpha

Bitcoin & Gold Lead YTD (Sharpe Ratio)

Goldman Sachs

According to the issuer, DAPP seeks to track as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Digital Assets Equity Index, which is intended to track the performance of companies that are participating in digital-asset economies. The ETF aims to invest in companies at the forefront of the digital assets transformation while offering investors diversification through exposure to exchanges, miners, and infrastructure firms. The issuer states that DAPP offers access to companies that have the potential of getting 50% of revenue from digital assets.

The ETF’s assets under management has held steady just above the $100 million mark this year, failing to rake in flows despite the proliferation of crypto ownership. DAPP’s 0.51% annual expense ratio is in the middle of the pack and the fund does not pay a dividend. Still, share-price momentum has remained high over the past year, though I will take issue with the near-term momentum trend by highlighting technical features later in the article.

DAPP remains a high-risk ETF when analyzing standard deviation trends and its somewhat concentrated portfolio. But liquidity is a concern with average daily trading volume of about 270,000 shares over the past 90 sessions and a median bid/ask spread of 55 basis points, per VanEck, so I encourage investors to use limit order when trading DAPP.

Looking closer at the portfolio, the fund plots in the lower-right corner of the style box. That’s indicative of a small-cap growth allocation, though there is a material 29% exposure to mid-caps. The major driver of price action will be the crypto theme and investors’ collective willingness to take on risk in companies with mixed fundamental characteristics.

In net, DAPP’s price-to-earnings ratio is significantly down from when I looked at the ETF last year. The multiple is now under 20 while VanEck notes that the price-to-book ratio is just 1.97 as of April 30, 2024. So, the valuation picture is much improved today.

DAPP: Portfolio & Valuation Data

Morningstar

My primary concern with DAPP is the top-heavy allocation. More than 60% of the fund is invested in its top 10 assets. That works well during periods of upside price action, as we saw over the final three months of 2023.

This year, however, price has merely consolidated, so the result is high volatility and weak risk-adjusted returns. Being a niche and thematic ETF, there’s high exposure to the fintech space with no equity holdings from sectors other than Financials and I.T.

DAPP: Sector Allocation & Positioning Detail

Seeking Alpha

Readers know that I like to look at seasonality whenever I'm investigating a stock or an ETF. In this case, DAPP does not have a very long track record off of which to analyze, so let's peek at the seasonal tendencies of Bitcoin. You'll see that June and July have historically been bullish.

Both months are up 60% of the time, with typical gains in the 5% to 8% range. Investors should be wary of crypto-related assets in August and September, however, as those two months have typically encountered weakness in Bitcoin prices, which could be bearish for digital-asset stocks.

Bitcoin Seasonality: Bullish June & July

Stockcharts.com

The Technical Take

While Bitcoin has been steady in the past few months after a big surge beginning in January this year, price action in DAPP has been nothing to write home about. Notice in the chart below that there have been a series of lower highs and higher lows ever since the peak in early 2024. That's a consolidation pattern, and I see an upside price target of roughly $17.50 if a bullish breakout above the downtrend resistance line occurs, which is currently near the $11.50 mark – the symmetrical triangle range was about $6, so we would add that on top of a possible $11.50 breakout price.

Also, take a look at the rising 200-day moving average, which is currently just above the $8 level. That tells me that the bulls remain in control of the primary trend despite the multi-month consolidation in price. What also catches my eye is the high amount of volume of shares traded in DAPP ever since December of last year. So, we're seeing price consolidate as volume is picking up, which could amplify the eventual breakout or breakdown from this current symmetrical triangle formation.

Lastly, the RSI momentum oscillator at the top of the graph is mired in a neutral zone between 30 and 70, so we're not seeing overbought conditions or sell-offs that lead to significantly oversold readings in DAPP.

Overall, I see current support near $9 with resistance in the $11.00 to $11.50 zone.

DAPP: Consolidation Pattern Targets $17.50, Waiting on the Breakout

Stockcharts.com

The Bottom Line

I reiterate a hold rating on DAPP. I like that the valuation has come in, but the technical situation is neutral as we wait for a breakout or breakdown. I cautioned prospective investors that the rally in late Q4 last year was a dangerous parabolic move, so I’m not surprised to see the fund coil and grow into its valuation.

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